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Responding to Critics, S.E.C. Defends ‘No Wrongdoing’ Settlements

By Edward Wyatt February 22, 2012 5:17 pmFebruary 22, 2012 5:17 pm

Alex Wong/Getty ImagesMary L. Schapiro, the chairwoman of the Securities and Exchange Commission.

7:32 p.m. | Updated

WASHINGTON — The chairwoman of the Securities and Exchange Commission defended the agency’s record of settling fraud cases with Wall Street companies, saying on Wednesday that she believed the agency’s practices “clearly have deterrent value,” even though firms were often charged repeatedly for violating the same securities laws.

Mary L. Schapiro, the S.E.C. chairwoman, added that repeat offenders remained a problem because “people have short memories” on Wall Street. That forces the commission to bring many of the same types of cases “so that people don’t forget that they have these obligations and that somebody is watching and somebody is willing to hold them accountable.”

The remarks, at a news media breakfast, were the first by Ms. Schapiro to address the issue since a federal district judge refused last year to approve a commission settlement of fraud charges involving Citigroup.

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Critics of the agency have also raised concerns about its settlement practices over the last decade. According to a New York Times analysis of enforcement cases, nearly all of the biggest Wall Street firms have settled fraud cases by promising never to violate a law that they had already promised not to break, usually multiple times. In addition, the Times analysis showed, those settlements also repeatedly granted exemptions to the biggest Wall Street firms from punishments intended by Congress and regulators to act as a deterrent to multiple fraud violations.

The commission frequently settles cases and avoids court costs by allowing a Wall Street firm to pay a fine, often in the millions or hundreds of millions of dollars, while also agreeing that it will not deny that the fraudulent actions took place. The settlements usually do not require the defendants to admit any wrongful conduct.

“People won’t settle with us if they have to admit” wrongdoing, Ms. Schapiro said, because it opens them to liability in civil damages lawsuits. But because the settlements often carry terms that require a Wall Street firm to overhaul their compliance departments, she said, “there is a deterrent effect.”

The settlements “serve the purpose of putting the rest of the industry on notice,” she said, “about conduct we believe violates the law and can lead to hundreds of millions of dollars in fines, which I don’t think any firm enjoys paying, or seeing their name highlighted as somebody who’s violated the law.”

Some people have questioned that deterrent effect and the value of relying on the “neither admit nor deny” clause. Judge Jed S. Rakoff of the Federal District Court in Manhattan rejected the commission’s proposed settlement with Citigroup last year, saying that the lack of agreed-upon facts left him with no way to determine whether the settlement was fair, adequate and in the public interest.

The commission has appealed that ruling to the United States Court of Appeals for the Second Circuit in New York, which has yet to render a decision.

Ms. Schapiro said that she believed recidivism among Wall Street firms was so common “in part because these firms are enormous.”

Most Wall Street firms are part of large financial services companies that usually include a commercial bank, an investment bank, a brokerage firm, an insurance company and other types of companies.

“In these enterprises, there are lots of problems probably going on at any given time, in far-flung areas,” Ms. Schapiro said, like a structured products unit, the mutual fund management area or the brokerage firm. Sometimes the violations involve individual brokers or branch offices having little to do with the parent company.

“These are enormous undertakings and enterprises, and I think as we look in different areas of their businesses and we focus on different topics, we find problems over and over again,” she said.

The Times analysis found at least 51 cases at 19 different Wall Street firms in the last 15 years in which the commission had concluded that the company broke antifraud laws that it had previously agreed never to breach.

The Times also found nearly 350 instances in which the commission gave big Wall Street firms and other financial institutions a pass on sanctions which, as written in the securities laws and regulations, were to be automatically imposed on companies that settled or were convicted of fraud charges.

Ms. Schapiro said the commission entered a settlement only when the amount it expected to receive in fines was the same as the agency could reasonably expect to receive if it took the case to court and won. Settlements have the advantage of returning money to harmed investors quickly, she said, without years of litigation and delay.

“Our goal is always to maximize the return to investors,” Ms. Schapiro said. “If we had to litigate every case, we would bring a lot fewer cases.”